Lafarge Africa Plc (“The Company”) sustained its solid topline performance in Q2 2022 with double-digit revenue growth of 31% YoY to N95.98bn – its sixth consecutive rise since Q1 2021. We attribute this to continued demand from the private and public sectors. In our view, volume grew on the back of increased construction activities by the Federal and States government as well as increased real estate activities in the economy.
Cost Pressures Weaken Net Margins
Although volumes grew in Q2 2022, we believe that higher pricing impacted more on the revenue growth. Gross profit grew by 31% YoY to N53.89bn in Q2 2022, and the gross margin was flat at 56%.
However, the operating margin weakened by 500 basis points to 28% in Q2 2022, despite a 12% YoY absolute operating profit growth to N26.51bn. The operating margin decline resulted from significantly higher operating expenses. Operating expenses increased by 54% YoY to N27.51bn, largely due to higher distribution costs incurred during the period. Specifically, the spike in diesel prices (c.+100% increase) led to higher expenses.
The Company sustained its deleveraging efforts in Q2 2022, as reflected in a 71% YoY decline in finance costs. However, a N694mn foreign exchange loss (Q2 2021: FX gain of N1.34bn) further depressed the profit margin. Net profit grew by just 3% in Q2 2022 with a margin of 21% (Q2 2021: 26%).
We expect the trend of revenue growth to sustain in H2 2022, driven by higher prices. We expect volume growth to moderate, or even decline in the near term due to macroeconomic headwinds, relating to purchasing power in the economy, dwindling government revenues, and higher interest rates (which lowers real estate activities). We also expect that higher energy costs will cap profit growth in H2 2022. However, we maintain a positive outlook for the company, given the widening infrastructural deficit in the Nigerian economy, which serves as a clear opportunity for growth.
Having incorporated the lower-than-anticipated Q2 2022 performance and revising our growth expectations for the remaining quarters of the year, we now have a revised earnings per share (EPS) projection of N4.26 for FY 2022 from our previous estimate of N4.39.
Accordingly, our fair value for the stock is now N36.92 (previous estimate: N37.80). Based on our fair value, the stock offers a 55% total return (inclusive of a 10% dividend yield). We maintain our BUY recommendation.
Please follow the link “Lafarge Africa Plc H1 2022 – Profitability Suffers as Operating Expense Soar” to view the whole report.
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